Panel confirms greater role for pension scheme trustees during company takeovers

The Takeover Panel, which creates and enforces a Code governing how companies can and cannot be taken over, said that the changes would take effect from 20 May. It will publish an amended version of the Takeover Code on this date, it said.

The amendments follow last year's consultation on changes to the Code, aimed at "facilitating debate" and giving pension scheme trustees the opportunity to express their views during a takeover. Trustees will also be given the same rights to receive documents relating to the takeover as employee representatives. However, trustees will not have any rights to block a takeover or make any deal conditional on future scheme funding guarantees.

In a statement (42-page / 105KB PDF), the Takeover Panel's Code Committee confirmed that it had made some amendments to last year's proposals as a result of feedback to the consultation. In particular, defined contribution (DC) pension schemes will be excluded from those schemes in respect of which the bidding company must state its intentions when making an offer.

Pensions law expert Simon Tyler of Pinsent Masons, the law firm behind Out-Law.com, said that the modifications were "sensible". He also welcomed the increased transparency with regards to any pension schemes involved in company takeovers that the revised Code would bring.

"Particularly where a defined benefit pension scheme with a deficit is involved, trying to keep the trustees out of the loop is asking for trouble," he said. "Companies that fail to enter open discussions with trustees early on in takeover negotiations risk finding themselves at the wrong end of the Pensions Regulator's powers."

"The principle of simplification behind the Committee's changes is welcome. The obligations have been trimmed down and, sensibly, details of defined contribution schemes have been taken outside the scope of the disclosure," he said.

DC pension schemes do not guarantee what members will get when they retire. Contributions to the scheme are invested in an agreed way, and the employee can then buy a pension with whatever funds are available on retirement. Unlike traditional defined benefit (DB) schemes, which promise a set level of pension once an employee reaches retirement age no matter what happens to the stock market or the value of the pension investment, it is the employee who bears the full risk of a DC pension losing value or not performing as well as expected.

The changes follow lobbying from the pensions industry during the Takeover Panel's 2011 review of takeover regulation. At the time, the Panel said that trustees and their representatives had requested that similar information to that which employee representatives are entitled to receive should also be disclosed to trustees. However, the suggestion was "outside the scope" of that consultation process, it said.

In its latest statement, the Code Committee said that most respondents to its 2012 consultation were supportive of its proposed amendments, particularly scheme trustees themselves and pension scheme advisers. Members of the legal profession and the private equity industry were the "principle objectors" to some of the changes, it said.

In relation to the type of pension scheme that should be covered by the new disclosure requirement, the Committee said that schemes which provided benefits on a DB basis, either in whole or in part, would have "the potential for a funding deficit relative to the cost of providing the accrued benefits". Trustees and scheme managers would "be concerned to understand the employer's intentions regarding the scheme", including how they planned to fund any deficit, it said.

"The Code Committee believes that the Code should provide the ability for the trustees (or managers) of such a scheme to participate in a debate as to the effects of an offer on the scheme," it said in its statement. "The Code Committee considers that the relevant provisions of the Code should apply in circumstances where the scheme is sponsored by the offeree company itself or by any subsidiary."

Where pension benefits were only provided on a DC basis, there would be "no debate to be had between trustees (or managers) and an offeror as to the effects of the offer on the scheme", the Committee said. Contributions under these schemes would already by caught by the Takeover Code, which requires the bidder to state "its intentions with regard to the continued employment of the employees and management" of the target company, including any "material changes" in conditions.